Nvidia's AI Investment Fate Hinges on Earnings Report

Nvidia's AI Investment Fate Hinges on Earnings Report

This week, as chipmaker Nvidia unveils its earnings, Wall Street's staggering bet on artificial intelligence faces a moment of truth. Investors are keenly searching for signs to prove the bubble talk is just fearmongering. Three years after the emergence of ChatGPT, investors are increasingly uneasy about the AI frenzy detaching from fundamentals. Some business leaders point to 'circular deals' among partners to artificially inflate revenues, exacerbating bubble risks.

AI Holdings Sell-Off

Some large investors have already offloaded portions of their AI holdings, sparking worries of an impending market sell-off. Tech billionaire Peter Thiel’s hedge fund sold its entire stake in Nvidia in the third quarter, as did SoftBank CEO Masayoshi Son, though he has reinvested those returns into a massive bet on OpenAI. These concerns have driven Nvidia's stock down 7.9% so far in November, after it soared 1200% in the prior three years. The broader market, meanwhile, is down 2.5% this month. "Each quarter Nvidia's earnings report becomes more important in illuminating which direction artificial intelligence is going and how much actual money is being put to work," said Brian Stutland, chief investment officer at Equity Armor Investments, an Nvidia investor.

Strong Demand Amid Concerns

Despite bubble worries, market demand for Nvidia's chips remains robust, with cloud computing giants including Microsoft pouring billions into AI data centers.

Growth Deceleration & Depreciation Concerns

Nvidia is likely to report revenue growth of over 56% year-over-year to $54.92 billion for its August-to-October fiscal quarter, according to data compiled by LSEG, but that marks a significant deceleration from its triple-digit growth in prior quarters as it faces a tougher comparison. The company has beaten performance expectations for the past 12 quarters, but the margin of outperformance has narrowed. Nvidia CEO Jensen Huang said last month the company has a $500 billion order backlog for its advanced chips through 2026. "There's an old saying on Wall Street that 'one stock can't represent the entire market', but that adage is wrong here," said Neil Azous, portfolio manager at Monopoly ETF, an actively managed ETF that holds Nvidia stock. "Nvidia has the ability to move the entire market."

Burry's Shorts and Depreciation Issues

But Nvidia's chips are the core reason why Michael Burry, the prototype of 'The Big Short,' shorted the company. Burry, who recently closed his hedge fund, believes large cloud service providers are artificially inflating earnings by extending the depreciation lifespan of AI computing hardware such as Nvidia chips. Nvidia now refreshes its chips annually, making older models obsolete faster, although a resale market remains vibrant.

Process Complexity & Margin Pressure

Nvidia is still working through chip supply shortages. While chipmaking giant TSMC is boosting advanced packaging capacity to overcome a critical bottleneck and plans continuous expansion through 2026, Nvidia itself is also rolling out more complex, larger-scale systems bundling graphics processors, central processors, networking gear and a suite of cooling solutions. That, coupled with continued ramp-up of its flagship Blackwell chip and upcoming Rubin processor, is putting pressure on margins. Nvidia is projected to report that its adjusted gross margin for the third quarter shrank by nearly 2 percentage points year-over-year to 73.6%. Net income is likely to have risen 53% to $29.54 billion. Investors are closely watching how Nvidia's large AI deals, including its $100 billion investment in OpenAI and $5 billion stake in chipmaker Intel, will affect its balance sheet. As of July 27, Nvidia held $11.64 billion in cash and cash equivalents.